Business Matters

Two Cents

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My first job in real estate, had nothing to do with listing or selling houses-rather I was the eight year old office cleaner at my fathers small brokerage; Herb Neumann Real Estate. His office at the time was located on the corner of Woolwich and Cardigan street, in an old house that sat on what is now an empty parking lot. Early on Saturday mornings I would come into the office, vacuum, dust and empty the trash cans of all but one desk. My strict instructions were not to touch either the desk nor trash can of Denzil Williams. Mr. Williams I was told, did not want to risk misplacing a single contact and preferred to tidy his own work place. I recall wishing my father had more agents like Mr. Williams. No doubt my father did as well. Mr. Williams, by then well into his fifties, was in the beginning stages of forming Williams & McDaniel with his office mate, some two generations his junior, Clark McDaniel. By the time I became a licensed Realtor, some thirteen years later, Williams & McDaniel had moved their head quarters to its current location, the corner of Wyndham and McDonnell beside the Petrie building. Their friendship with my father, and sense of loyalty however remained, and I was the grateful benefactor- not so much financial as intellectual. Though I did have the opportunity to list some properties for sale for them the real bonus for a young wet behind the ears kid, was the hours of conversation with someone who had by then become, ( and remains) one of Guelph’s largest and most successful landlords accumulating over 1300 residential units in addition to an office and commercial portfolio spread out throughout southern Ontario. It was through my conversations with Mr. McDaniel, that I formed two lasting opinions on real estate in general, and investment real estate in particular.

Real estate is not immune to basic economic principles and economies of scale, effect investment real estate in a profound way. For someone reared with a ‘walk before you run’ mindset, hearing Mr. McDaniel assert ‘ it’s easier ‘ ( and less expensive) ‘to manage a 60 unit building than a 6 plex’ was a bold statement. The reasons are several, but the primary reason is a 6 plex is not large enough to house a building superintendent. A good building super undertakes many of the duties a prudent owner would -rent units, collect rent, paint units, undertake minor repairs etc…. Coupled with the fact that 6 plexes generally sell for a hefty premium on a per unit basis ( roughly 25% in today’s market) it is easy to understand why the purchaser of a 6 plex is at a considerable disadvantage over someone able to invest in a 60 unit building. Additional factors, most notably lower interest rates for larger buildings, conspire to slant the advantage even more heavily in favour of the larger investor. At this point, you may very reasonably conclude that my assertion is well and good, for someone who has the resources and know how to locate, finance and purchase a large building. Most of us, in this day and age don’t, and it is only likely to get worse for small investors. Enter the real estate investment trust or REIT. REIT’s have the OPM (other people’s money) advantage and have over the past decade made it more and more difficult for small investors to compete. Small investors are therefore faced with the choice. ‘Should I purchase a 6 plex for $120,000 per unit, and enter the marketplace in which I will compete for tenants with someone who purchased their units of $90,000 per unit? – or am I better off investing my money with them?’While the mathematical answer may appear to be a straightforward one, personal tolerances and preferences also play a role in our decision. For those of us who crave autonomy, ( myself included) buying our own investment property – even a single condominium unit-may still be the way to go (and certainly better than doing nothing at all). For the rest, a REIT is an excellent bricks and mortar option. Skyline, a local company whose founders also coincidentally began their real estate careers at Coldwell Banker Neumann Real Estate, has upwards of 2 billion dollars worth of real estate that you can be a part of. The math is the same in either case, only the decimal place has shifted. The second lasting impression I took from my conversations with Mr. McDaniel is the importance of seeking the counsel of someone who knows more than I. In my particular case as a licensed realtor of 21 years of age – that was not very hard! And admittedly, having access to someone as accomplished as Mr. McDaniel was exceptionally good fortune. However, I’m sometimes struck by our general willingness to seek advice from people not much more qualified for the task than we ourselves. Even more confounding, is their willingness to dispense it. Would you buy a car from someone who rode their bicycle to work? Maybe. But there might be a credibility gap to address. There is no better teacher than experience and reading an article ( or for that matter writing an article) and taking a course does not an expert make. That is not to say that you need to be an owner to understand the business, you don’t. But it certainly helps. Our profession is one which likes to remind consumers that their home is the largest investment they are liable to make in their lives, and therefore, the services of a professional Realtor are needed. It is, in my view, a well advised assertion. The guidance of a true professional are a bargain at twice the price. There is no worse time to mistake price for value than when it comes to your financial wellbeing. The same holds true on the investment side of the ledger. What constitutes a true professional will be up for each of us to decide, however in my experience, seeking the counsel of someone who knows more than I is vital. Fortunately for the serious real estate investor, there are no shortage of true professionals available to guide you through the process. Consumers, (and agents for that matter) would be well advised to consider the qualifications of those whose counsel they seek. Be sure your advisor has walked the walk- or at the very minimum, can put you in direct touch with someone who has.Thanks for reading, and Happy New Year!

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